Logan Ridge Finance - Q2 2024

Executive Summary

• Q2 2024 delivered steady investment income with Total Investment Income of $5.37M and Net Investment Income of $0.75M ($0.28 per share), while GAAP net assets from operations were negative ($0.25 per share) due to $1.3M net realized/unrealized portfolio losses and $0.1M dividend coverage shortfall.
• Dividend held at $0.33 per share for Q3 2024, signaling confidence in portfolio earnings power despite spread compression and modest NAV decline to $33.13 per share ($88.7M).
• Portfolio quality stable: no new non‑accruals; weighted average annualized yield held at ~11.4%; debt mix ~80% of fair value; non‑accruals concentrated in three borrowers (four securities) at $10.1M FV (5.2%).
• Street consensus from S&P Global was unavailable for LRFC; therefore, beat/miss vs estimates cannot be assessed (S&P Global consensus not available; estimates mapping missing).

What Went Well and What Went Wrong

What Went Well

• Total Investment Income increased sequentially to $5.37M (+$0.37M QoQ), supported by higher average debt outstanding and stable portfolio yield ~11.4%.
• No new non‑accruals; debt investments on non‑accrual remained in three portfolio companies, with non‑accrual FV down slightly to $10.1M, indicating stable credit performance.
• Management reaffirmed confidence and declared another $0.33 quarterly dividend: “We continue to see attractive opportunities... we will remain opportunistic deployers of capital”.

What Went Wrong

• Net Investment Income fell to $0.75M ($0.28/share), down from $0.90M ($0.35/share) in Q1, driven by $0.3M non‑recurring professional fees and higher financing costs.
• NAV per share decreased to $33.13 from $33.71, primarily due to $1.3M net realized/unrealized losses and dividend exceeding NII by ~$0.1M.
• Unrealized losses were concentrated: American Clinical Solutions (cannabis/hemp testing) and a broadly syndicated Avanti loan marked down, reflecting sector-specific and mark‑to‑market pressures.

Transcript

Operator (participant)

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's second quarter and June 30, 2024 earnings conference call. An earnings press release was distributed yesterday, August 8. After the call, or forgive me, after the close of the market. A copy of the release, along with the supplemental earnings presentation, is available on the company's website at www.loganridgefinance.com in the Investor Resources section, and should be reviewed in conjunction with the company's Form 10-Q filed with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements which are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President, and Director of Logan Ridge Finance Corporation, Brandon Satoren, Chief Financial Officer, and Patrick Schaefer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Ted Goldthorpe (CEO)

Good morning. Welcome to our second quarter 2024 earnings call. As mentioned, I am joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schaefer. Following my opening remarks, Patrick will provide additional details on our investment activity to date, and Brandon will walk through our financials. Before Patrick and Brandon provide more details on our portfolio and financials, I would like to discuss a few key highlights from the quarter. During the second quarter, we continued to make progress towards our strategy of reducing the company's exposure to the legacy equity portfolio and increase the exposure to credits originated by the BC Partners Credit platform. The benefits of such strategy resulted in a steady increase in our total investment income quarter-over-quarter.

Second quarter total investment income increased by $400,000 to $5.4 million, $5.0 million the previous quarter, and by $100,000 as compared to the same quarter last year. Additionally, the underlying credit performance of our portfolio has remained strong, with no new investments being placed on non-accrual status during the quarter. Furthermore, the strength of the company's financial position and the outlook for the long-term earnings power of the portfolio has allowed the company to declare a third quarter distribution of $0.33 per share. The dividend has almost doubled compared to the $0.18 per share distribution we declared in the first quarter of 2023, when we reintroduced our quarterly dividend, highlighting the company's successful turnaround story since we took over management back in July of 2021.

Looking forward to the second half of 2024, we continue to see attractive opportunities in our portfolio in our pipeline to deploy our available capital. New deal activity has picked up pace, and the syndicated markets have continued to remain open. Our borrowers have continued to rely heavily on private capital providers for M&A activity, given the certainty they provide, resulting in tailwinds for our industry. Having said that, combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression in certain parts of the private credit market. According to KBRA DLD private data, private credit spreads for borrowers with greater than $100 million of EBITDA and those between $50 million and $100 million of EBITDA have both declined by approximately 75 basis points since the beginning of the year.

That is compared to spread compression of approximately 50 basis points for our borrowers between $20 million and $50 million of EBITDA, and just over 25 basis points for borrowers with less than $20 million of EBITDA. We remain focused on increasing shareholder value through the diligent deployment of capital, continued rotation out of legacy investment portfolio, and by leveraging and maximizing the earnings power of the company's balance sheet. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer.

Patrick Schaefer (Chief Investment Officer)

Thanks, Ted, and hello, everyone. As of June 30th, 2024, the fair value of Logan's portfolio was approximately $195.6 million, with exposure to 61 portfolio companies. This compares to 62 portfolio companies with a fair value of approximately $200.1 million as of the prior quarter, and 62 portfolio companies with a fair value of $206.6 million as of June 30th, 2023. During the quarter ended June 30th, 2024, while our pipeline of new opportunities remains strong, we continue to be prudent and judicious on the deployment front.

Specifically, coming off a strong quarter of net deployments during the first quarter of 2021, in the second quarter, we deployed approximately $1.5 million in new and existing investments and had approximately $5.6 million in repayments and sales, resulting in net repayments and sales of approximately $4.1 million for the quarter. Regarding portfolio composition, as of June 30, 2024, 59.4% of the company's portfolio, investment portfolio at fair value was invested in assets originated by the BC Partners credit platform. As of June 30, 2024, our debt investment portfolio represented 80% of the total portfolio at fair value, with a weighted average annualized yield of approximately 11.4%, excluding income for non-accruals and collateralized loan obligations....

This compares to a debt investment portfolio, which represented 80.8% of our total portfolio at fair value, with a weighted average annualized yield of approximately 11.4%, excluding income from non-accruals and collateralized loan obligations as of the prior quarter, and 82.2%, with a weighted average annualized yield of approximately 10.8% as of June 30, 2023. Notably, while the weighted average annualized yield, excluding income from non-accruals and collateralized loan obligations, remained unchanged from the prior quarter, it increased by 60 basis points as compared to the prior year.

As of June 30th, 2024, 88.1% of our debt investment portfolio at fair value was bearing interest at a floating rate, compared to 88.5% as of March 31st, 2024, and 83.2% as of June 30th, 2023. As of June 30th, 2024, first lien debt represented 65.8% and 64% of our portfolio at cost and fair value, respectively. This compares to first lien ebt representing 66.5% and 65.2% of our total portfolio on a cost and fair value basis as of March 31st, 2024, and 66.1% and 66.8% of our total portfolio on a cost and fair value basis, respectively, as of June 30th, 2023.

The equity portfolio represented 15.2% and 19.0% of the portfolio on a cost and fair value basis, respectively, as of June 30, 2024. This compares to 15.2% and 18.2% of the total portfolio on a cost and fair value basis as of March 31, 2020. Moving on to non-accrual status. As of June 30, 2024, the company had four debt investments across three portfolio companies on non-accrual status, with an aggregate amortized cost and fair value, $17.2 million and $10.1 million, respectively, or 8.5% and 5.2% of the investment portfolio at cost and fair value, respectively.

This remained unchanged from the first quarter, which had four debt investments across three portfolio companies with a cost and fair value of 17.2% and 10.6-$17.2 million and $10.6 million dollars, respectively, or 8.3% and 5.3% of the investment portfolio's cost and fair value, respectively. I'll turn the call over to Brandon.

Brandon Satoren (CFO)

Thanks, Patrick. Turning to our financial results for the quarter ended June 30, 2024. For the quarter ended June 30, 2024, Logan generated $5.4 million of investment income, an increase of $0.4 million as compared to $5 million for the prior quarter. Total operating expenses for the second quarter increased by approximately $0.6 million to $4.6 million, as compared to $4 million for the prior quarter. This was largely due to $0.3 million, or $0.10 per share, of certain non-recurring incremental professional fees and other expenses incurred in the quarter, as well as higher financing costs, primarily as a result of higher average outstanding debt.

Our net investment income for the second quarter was $0.8 million, or $0.28 per share, a decrease of $0.1 million from $0.9 million, or $0.35 per share in the first quarter of 2024. Again, the decrease from the prior quarter was largely due to non-recurring incremental professional fees during the quarter. Our net asset value as of June 30, 2024, was $88.7 million, representing a $1.5 million dollar decrease as compared to the prior quarter net asset value of $90.2 million. On a per share basis, net asset value was $33.13 per share as of the second quarter, representing a $0.58 per share decrease as compared to $33.71 as of March 31, 2024.

The decrease in net asset value quarter-over-quarter was driven by net realized and unrealized losses on the portfolio of $1.3 million, as compared to the company's, as well as the company's quarterly dividend payment exceeding the company's net investment income by $0.1 million. Finally, as of quarter end, the company had $4.3 million in cash and cash equivalents, as well as $21.9 million of unused borrowing capacity available for deployment in investments originated by the BC Partners Credit platform. With that, I will turn the call back over to Ted.

Ted Goldthorpe (CEO)

Thank you, Brandon. Before we go to Q&A, I just want to say to our shareholders a big thank you for your continued support. This concludes our prepared remarks, and I'll now turn over the call to the operator for any questions.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the roster. With that, we'll begin the question and answer session. Our first question comes from the line of Christopher Nolan from Ladenburg Thalmann. The line is open.

Christopher Nolan (Senior VP)

Hey, guys. Any share repurchases in the quarter?

Brandon Satoren (CFO)

Chris, unfortunately not. We've been blacked out during the quarter, but we'll look to get that up and running as soon as we can, hopefully within the next couple weeks here.

Christopher Nolan (Senior VP)

Sounds good. And then also, strategically, I mean, aren't the stars beginning to align for a merger between Logan Ridge and the other BDC you run? Given, you know, it looks like, you know, with the things profitable, Logan Ridge is now profitable, now dividend paying, but the valuation discrepancy on a price-to-book basis between the two entities is still quite significant.

Patrick Schaefer (Chief Investment Officer)

Yeah, I think to answer that question, I mean, you know, it is something that we are obviously thinking about. And I'd also say, naturally, our portfolios are becoming more and more alike between both Logan and Portman. So I think your comment is pretty spot on.

Christopher Nolan (Senior VP)

Okay, nice quarter. Thanks, guys.

Ted Goldthorpe (CEO)

Thanks, Chris.

Operator (participant)

Thank you. Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. Our next question comes from the line of Steven Martin of Slater Capital Management. The line is open.

Steven Martin (President)

Hi again, guys.

Ted Goldthorpe (CEO)

Hey, Steve.

Steven Martin (President)

Hi. Two questions. Back to the unrealized category. You had an unrealized loss this quarter. Was it something specific? Was it across the portfolio? Did something reverse?

Ted Goldthorpe (CEO)

Yeah, it's generally speaking, one name is the bulk of it, American Clinical Solutions. The company had, like, a bit of a challenging year, as sort of... They are a cannabis and hemp testing business based in Florida. The year has been a little bit challenging as Florida is working towards recreational legalization this year during the election. So a lot of companies are sort of pulling back on spending in this area as they kinda wait to see where, like, everything shakes out with recreation. So, you know, I think we generally expect there to ultimately be a bounce back once the election kinda goes through, and from everything we've understood, we think recreation should pass, which is a huge benefit to the company.

But, but even putting that aside, just kind of having a more, a more settled environment will help them, you know, and, and their customers sort of more consistently spend.

That's kinda, like, the biggest one. And then the second one is a company called Avanti. It's a broadly syndicated loan. And that loan moved down a handful of points. And that was the driver. Again, we think that's mark to market as opposed to anything that's credit risk.

Steven Martin (President)

Gotcha. Major topic, as always, is the equity portfolio. Other than some slight changes in valuation, Nth Degree keeps improving, it doesn't look like there was any change in positions?

Ted Goldthorpe (CEO)

No, that's, that's generally right. So, again, as we've kind of mentioned a couple different times, I do think the M&A market in general over the course of this year, will ultimately be a benefit for us here within Logan, as there are, we know there are a number of portfolio companies that, you know, hopefully will be looking to, to exit themselves. So we're optimistic that sort of the, the market environment will be fairly conducive, fairly conducive. We did have one small exit, Usio, where, again, kind of similar to our playbook in a lot of other situations, we actually went directly to the, directly to the owners and, and tried to, and again, negotiated it and exited it. It was a relatively small, number.

I want to say it was about $500,000 or something, and we had it marked at $350,000-$400,000, something like that. So that was relatively small. But again, kind of thematically, just given where the macro is right now, you know, we're able to sort of engage in those types of transactions, where the last probably 18-24 months, you know, it, it's been difficult to engage with owners of the company for things like that. So we are optimistic that, you know, we're on the, you know, you know, we're able to transact in a couple different of our equity portfolio companies. And, you know, again, hopefully, we can get those done by the end of the year.

Yeah, there are only a couple that really matter. There are a whole bunch of little ones.

Most of the... You know, having done some research on the bigger positions, most of them are, have been around for a while. I mean, they're not young, transactions.

No, that's right. You know, again, just going down the list of our largest ones, Nth Degree, which obviously is the largest, that was acquired in 2019. So again, just kind of think about a private equity schedule, you know, that's, you know, you're coming up on sort of five years of a whole period, and it's as you can tell from our valuations, it's generally grown pretty nicely. So, and you know, the other largest one, which I think is Burgaflex, also again, we've been in the name for quite some time, and it's been owned by the same sponsor for quite some time.

So yeah, you would likely think from a whole period perspective, those folks would kind of be at the point where they probably would be monetizing their portfolios.

Steven Martin (President)

Yeah, just as a question, you know, having looked at, I guess it's Gladstone, who is the other Nth Degree holder. They have their, their equity marked substantially higher than yours, and it looks like it moved up again this quarter. Can you comment on, you know... I mean, it, it—when I say substantially, it's 20%-25% higher than what you have the same shares marked.

Patrick Schaefer (Chief Investment Officer)

Yeah, Steve, I, I think they actually marked theirs down this quarter, but it is still, you know, meaningfully higher than ours. Obviously, the number is a little bit wrong, but I think they're at, like, $2.99 a share, and we're at, and we're at $2.59 or something like that. But, yeah, again, I think, you know, hopefully from our perspective, you know, we are a relatively small owner. Gladstone is a larger owner and, and, you know, perhaps they have better information than we do, but we like to try and keep our equity valuations at a pretty conservative mark until, you know, we have something real to, to substantiate from a, from a valuation perspective.

Steven Martin (President)

All right. Thanks a lot. And, as the previous caller, I would urge you to get back on the share buyback route.

Ted Goldthorpe (CEO)

Of course. Thank you, Steve.

Operator (participant)

Thank you. Seeing as there are no more questions in the queue, that concludes our question and answer session. I will now turn the call back over to Ted Goldthorpe for closing remarks.

Ted Goldthorpe (CEO)

Thank you, everyone, for joining us today, and we look forward to speaking to you again in November, when we announce our third quarter 2024 results. Hope everybody has a great end of the summer, and please reach out to us with any questions. Thanks.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.